Tianjin Catastrophe Reinforces Need For Supply Chain Risk Management

A recent University of Tennessee-sponsored survey of leading supply chain executives helped quantify the continued apathy surrounding the proper assessment and management of supply chain risk. For starters, the survey found that none of the companies surveyed use third parties to independently assess their risk, 90 percent don’t even quantify the risk themselves, and while 66 percent acknowledged the existence of corporate officers focused on managing legal compliance, none of these same professionals touched the supply chain.

If HR can be directed to manage against the cost of a potential employee discrimination suit, how did global companies get to a place where they still don’t see the wisdom in protecting themselves against a potential supply chain disaster?

The Port of Tianjin, China’s third largest, just blew up. For companies that rely on that port and that didn’t have a crisis playbook in place, the lessons they’re about to learn could be fatal. If you saw the video of the explosion and are even remotely familiar with Chinese industrial accident rates (70,000 lives lost each year) then you know that the Chinese media is under-reporting the story and that “business as usual” at the Port of Tianjin is likely on indefinite hold.

But here’s the rub: if the Longshoremen at the Port of Long Beach decided to strike unexpectedly next week, the business effects for those without contingency plans could be strikingly similar. That’s how tenuous multi-tier supply chains can be.

Supply chain risk management (SCRM) is defined as "the implementation of strategies to manage both everyday and exceptional risks along the supply chain based on continuous risk assessment with the objective of reducing vulnerability and ensuring continuity.” It’s yet another operational discipline that technology has recently enabled to new heights, as the ripple effects of a catastrophic supply chain event are not intuitive. In fact, they’re usually mind-boggling.

For example, think of the impacts to the other ports in China as a result of Tianjin being out of commission. Do they have the capacity to deal with the oncoming surge? What will be the disruption timeframes for the smaller shippers and carriers who don’t have the capacity and transit options of the Wal-Marts of the world?

Literally, what’s in store for them?

Frankly, pure logistics disruptions are just the tip of the iceberg. Think about the relevant local maintenance and services infrastructure that has been damaged. And how do port officials navigate the complete loss of IT management systems? Can you imagine the manual workarounds that will now be necessary to process a ever increasing backlog of transactions? No doubt, cargo types will soon be prioritized and only the most critical will move anywhere. Who makes those decisions?

I haven’t even mentioned the downstream effects to companies whose orders went up in smoke. Let’s hope they didn’t pay in advance, their shipments were insured against business interruption losses and replacement inventory is immediately available from other ports. Forgive me, but my tongue is now firmly buried in my cheek.

The 2011 Japanese tsunami and Thailand floods were a wakeup call for many companies, but it may take the impacts of the Tianjin disaster to get a more rational number to make the move.

Fortunately, a tech-enabled solutions market for SCRM is finally emerging. Although the market remains fragmented, the latest and greatest allow companies to literally map and monitor the most critical component sources of their most important products. Some solution providers, like Achilles and Amerigo, provide mapping on a supplier/part level. And at least one solution provider, Resilinc, goes totally granular (multi-tier mapping and monitoring down to the part, plant/location level and revenue-at-risk level).

Bindiya Vakil, the CEO of Resilinc has the kind of background that speaks to the need. She has a Masters in SCM and a MBA in Finance from MIT. She talks in terms of achieving supply chain resilience through increased visibility, proactive analytics, real-time disruption monitoring, and response automation.

“Disasters such as the Tianjin Explosions often have consequences which are much more severe than originally contemplated and the full impact can takes years to unfold. Some companies will never fully recover or recover at all. The good news is that global supply chain risk management and resiliency practices and tools can not only help companies proactively mitigate the risks posed by disasters, but the can help transform such threats into opportunities to achieve a sustainable competitive advantage.”

The most successful companies manage their supply chains from a customer-centric point of view. Their supply chains are demand-driven, so the sourcing professionals who manage them are forced to understand a component market’s total capacity, not just selected supplier inventories. From a SCRM perspective, it’s about combining that knowledge with distribution and logistics strategies that are robust to potential disruptions –and then layering in all the financial considerations.

What’s hard to understand is that very little of what’s discussed in this post turned up in the UT study. Instead, the prevailing attitude that came across reinforced an antiquated refrain that goes something like this: “although SCRM is the right thing to do, there’s no reward in doing it, so it doesn’t get done.”

Look, when combining the risk/reward of low cost country sourcing with lean and JIT supply chain and manufacturing methodologies, you get a house of cards unless adequate supply chain risk mitigation strategies are a built into the mix. Beyond keeping track of critical parts, the latest and best in class solutions monitor, correlate and analyze the impact of disruptions. They create and monitor risk mitigation models and use scenario-planning tools that support what-if analysis. While they may not be as politically correct as an enlightened HR department, they are, at least, shareholder-wise for publicly traded, global manufacturing companies.

I started my career in IT solution design, which led to product management, and then an executive leadership role for technology services firm. Just before turning 30, I moved-on to become an early stage employee/investor of a tech start-up incubated at Carnegie Mellon wher...